If your salary is above the current thresholds, both you and your company must pay National Insurance Contributions to HMRC.
NI – the basics
The National Insurance system was originally put in place to protect workers during times of sickness and unemployment.
In recent years, National Insurance Contributions now accounts for an increasing proportion of total UK Treasury receipts. The NI system is seen by many as an additional income tax in all but name.
All UK employers pay Employers’ NICs on salaries paid to their employees, and employees pay Employees’ NICs on any income they earn.
Here, we look at how NICs are calculated, for both employers and employees.
This article has been updated for the 2023/24 tax year.
National Insurance for Employees
If you’re a contractor, you are an employee of your own limited company, an employee of an umbrella company employer, or in some cases, a PAYE employee of an employment agency.
As an employee, you pay Class 1 Employees’ NICs on earnings above the current Primary Threshold.
The Primary Threshold is £12,570 in 2023/4. In 2022/3, it was £11,908.
Employees’ NICs are 12% on salaries between £12,570 and £50,270 (the upper earnings limit), and 2% on salaries above £50,270.
If you work via an umbrella company or on a PAYE basis with an agency, income tax and NICs is deducted at source and paid to HMRC on your behalf.
If you work via your own limited company, you have more flexibility over your exposure to National Insurance.
Most limited company contractors pay themselves small salaries (either below, or just above the prevailing NIC ‘primary threshold’). This minimises any NIC liabilities.
Significantly, National Insurance Contributions are not payable on company dividends.
National Insurance for Employers
All employers pay Class 1 NICs on the salaries they pay to their employees.
If you work via an umbrella (or contract directly with an agency), your employer will account for employers’ NICs at source from your gross fees.
If you contract via your own limited company, the company must pay employers’ NICs on any salary payments.
For the 2023/24 tax year, employers’ NICs are 13.8% on salaries above £9,100.
No Employers’ NICs are due on an annual salary of £9,100 or less.
If your company can claim the Employment Allowance, this currently reduces the Employers’ NICs paid by limited companies to their employers up to a maximum of £5,000 per year. So, your employers’ NIC bill may be reduced (or cut completely) on salaries above the £9,100 threshold.
However, the eligibility rules have been tightened several times in recent years, and most small companies are ineligible to claim.
Other Types of National Insurance
The ‘self-employed’ pay Class 2 and Class 4 NICs.
Class 2 liabilities are paid via self-assessment (the rate is £3.45/week on earnings of £6,725 or more per year for 2023/4). This is the small profits threshold.
Class 4 liabilities are worked out via the self-assessment process each year.
Class 4 NICs are: 9% on annual profits between £12,570 and £50,270, and 2% on profits above £50,270 during 2023/4.
IT contractors rarely work on a ‘self-employed’ basis; the vast majority pay Class 1 contributions only as limited company or umbrella company employees.